June 1 (Bloomberg) -- The creators of the SPDR Gold Trust aren’t
modest about what that fund has done to the investment
landscape.

Before the World Gold Council started its exchange-traded fund,
or ETF, in 2004, gold was treated by investors much like
diamonds, paintings, or other collectibles, says Jason
Toussaint, managing director at the council. Everyone
acknowledged it was a valuable asset, but it wasn’t convenient
to own or trade.

Packaging gold in the form of an ETF, which trades throughout
the day like a stock, has transformed perception of the metal,
Toussaint says: “We have financialized gold.” Now, notes Jim
Ross, senior managing director of State Street Global Advisors
(STT), which markets the fund, “If you want to express a view on
gold, you can buy it just like you buy IBM.”

That’s made the gold market more volatile, says commodity trader
Jeffrey Friedman, senior market strategist at brokerage Lind-Waldock
in Chicago. Compared with even just five years ago, when the
cost and price of trading gold made investors cautious, now
“when data points come out that conflict with the theory you
have as an investor, money travels in the blink of an eye and
volatility no question has increased,” says John Stephenson,
portfolio manager at First Asset Investment Management and
author of “The Little Book of Commodity Investing.”

SECRET VAULT

In launching an ETF, the World Gold Council jumped on a hot
trend -- the number of ETFs tripled from 2003 to 2006, according
to the Investment Company Institute. The goal was simple. The
council, comprising 22 gold mining companies that make up 60
percent of the world’s annual production, wanted to expand
demand.

Unlike many commodity funds, the ETF holds gold in physical
form. Investors in the ETF have filled a vault in a secret
location in London with 1,210 metric tons, or $58.7 billion, of
gold. That makes the trust, often referred to by its ticker,
GLD, the largest commodity ETF in the world. Only four nations -
- the U.S., Germany, Italy, and France --have more gold in their
vaults, according to the council.

The fact that GLD shares are backed by bullion is a big part of
its appeal. To invest in most other commodities, funds have to
buy futures, financial instruments promising delivery of these
commodities at a later date. The price of a commodity and its
futures contract can differ, and even small differences can cost
investors over the long term. With one-tenth of an ounce of gold
behind every share, GLD tracks the price of gold closely. In
2010, GLD rose 29.3 percent; the spot price of gold rose 29.6
percent.

’PRECAUTIONARY INVESTMENT’

Gold performs an important function in a portfolio, as it tends
to zig when other assets, such as stocks, zag. DundeeWealth
Chief Economist Martin Murenbeeld believes investors have
returned to a view of gold as a preserver of wealth that holds
value independent of local currencies or central bankers. That’s
a switch from the 1970s to ‘90s, when jewelers made up the vast
majority of gold buyers, he says. Even though Murenbeeld is
bullish on gold, he views it as a “precautionary investment” --
“put some gold in your portfolio and hope it doesn’t go up.”

That hope would’ve been dashed in recent years, as fears of
inflation and economic instability have sent investors flocking
to gold. An investor who held GLD since 2004 would’ve seen
shares gain 232 percent, while the Standard & Poor’s 500-stock
index rose 12.4 percent. A less pleasing period for gold
investors was from September 1980 to August 1999, when gold’s
price fell 62 percent. Over the same period, the S&P 500 rose
952 percent.

While a bar of gold in the bank may bring peace of mind, owners
of GLD need a strong stomach. After the spot price of gold rose
10 percent in 2011’s first four months to an all-time high on
Apr. 29 of $1,563.70 per ounce, it dipped 5.7 percent in the
next four days. The recent volatility coincides with a 7 percent
drop in the size of the trust, from 1,280 metric tons at the end
of 2010 to 1,192 metric tons on May 17. GLD “introduces a more
fickle group of buyers into the market who are just driven by
sentiment,” says Stephenson.

EXCHANGE-TRADED NOTES

While GLD is the big man on campus, there are many other ways to
invest in gold, including gold exchange-traded notes, or ETNs,
which are debt securities that trade on an exchange. Paul J. Simon,
chief investment officer at Tactical Allocation Group, uses GLD
in client portfolios along with the iPath Dow Jones-UBS
Commodity Index Total Return ETN (DJP), which tracks a broader
index of commodities. Barclays Bank guarantees that the iPath
ETN will get the same returns as the index.

A potential problem is that investors put all their faith in one
counterparty, the bank backing the ETN, says Simon. Such
concerns were heightened by the collapse of Lehman Brothers in
2008.

With GLD, the risk would be that the gold is not in the vault.
GLD’s gold is stored by its trustee, HSBC Group. Every day, HSBC
publishes the serial numbers of all the gold bars in its vault
backing the ETF. Once a year, an accounting firm audits HSBC’s
vault procedures, and twice a year an independent firm counts
all the gold bars and weighs a random selection of them, says
Toussaint.

MINING STOCKS

Another way to get exposure to gold is by owning stocks of gold
miners, but the connection to the metal’s price is not as
direct. Sometimes gold stocks can do better than gold, and
sometimes they lag for years at a time. Plus, says First Asset’s
Stephenson, there are other considerations when buying a stock,
such as “Is management good?”

Volatility or not, investing in gold via ETFs is likely to grow.
Since the start of 2007, the number of ETFs fully invested in
physical gold has risen from seven to 18, and GLD rivals are
springing up in the U.S., U.K., Germany, Turkey, Dubai, and
India. GLD and other ETFs made up 9 percent of all gold
purchases in 2010, according to the World Gold Council.

Such interest bolsters the argument that gold’s price will head
higher as it becomes a permanent part of more portfolios. What
an investment in a gold ETF likely won’t bring, as new investors
and speculators jump in and out of the market, is peace of mind.